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SINCE BECOMING CHIEF INVESTMENT OFFICER of Texas' $100 billion-plus Teacher Retirement System in 2006, Britt Harris has been out front, guiding the pension plan into investments like hedge funds, private equity and real estate.

"The idea is to make the best use of our natural advantages of a very long investment horizon and no withdrawal demands," says Harris, 49, in an interview at his bunkerlike office hard by the University of Texas at Austin.

But it hasn't always been a smooth ride. Harris, a fourth-generation Texan who spent much of his career back East overseeing hedge-fund Bridgewater Associates, has put the huge plan into multimillion dollar deals to buy the land beneath suburban Las Vegas casinos and acquire Mexican industrial properties that some critics think are beyond the purview of public funds. And others say that the plan to shift about $38 billion into alternative investments -- an unprecedented move -- is too risky.

But there's a compelling need for TRS and other state plans to get more creative and aggressive at managing their money -- which explains their increased use of alternative forms of investment. Many state funds didn't handle the bounty of the late-1990s stock rally very well. Early in 2000, the state's teachers won a 15% gain in retirement benefits -- which were quickly followed by $22 billion in cumulative fund losses over 2001 and 2002, as falling equity markets and low interest rates combined to mark down the value of its holdings. TRS went from fully funded in 2000 to $13.5 billion underfunded in 2006.

Thereafter, "the stock market seemed to be going sideways so we had to find another way to enhance return," says Dory Wiley, president of Dallas investment bank Commerce Street Capital. He's a TRS trustee who heads the alternative asset and risk-management committee.

Texas Gov. Rick Perry reorganized TRS, and Harris joined in late 2006 -- with a mandate to revise the fund's traditional 60%/40% mix of stocks and bonds to improve long-term returns under a wider variety of economic conditions.

A key element in Harris' plan: greater use of hedge funds, whose combined strategies can offer more flexibility in tough environments. He also wants more exposure to private equity, both as an investor in funds and as a co-investor with buyout partners, in the same way that sovereign funds have lately been snapping up opportunities.

Just a year into a five-year transition plan, Harris says he's on track. Returns have jumped above their long-term trends. As of Sept. 30, 2007, TRS' total returns were 10% for the nine months, 16.3% for the year and 13.4% for three years, in line with the average return for a pension fund with more than $10 billion in assets.

For Harris, it's taken time to get used to the transparency required to run a big public pension plan. "It's a trade-off between being open and accountable, while not being afraid to make an investment that may run contrary to public sentiment," he says.

For example, TRS took some heat in the press for investing $100 million with Colony Capital in a deal that will ultimately develop casinos near Las Vegas with
Station Casinos
-- the fund's first major direct real-estate investment under the new plan. Some question whether a public pension fund should be profiting -- directly or indirectly -- from gambling. But it was also a unique opportunity to purchase the land on which the specially grandfathered casinos will be built.

Then there's the issue of Harris' incentivized annual compensation of $904,500, which could make him among the highest-paid public servants in Texas if he meets his objectives. Harris says that if his main interest were money, he'd have stayed in the private sector, where he could generate a multiple of his current take. "I hope he earns his bonus every year, because he'll have added billions to the fund, says TRS executive director Ronnie Jung. "He's brought the vision and direction that we've needed."

Harris says his intent is to get the best possible results for the 1.2 million Texas public education employees who participate in the plan.

It's partly personal. Harris and his boss Jung have family members who are TRS participants. "My mother's a retired fifth-grade teacher in Mesquite, Texas. Teachers have a terrific job, but the compensation is not so good. My job will be to enhance and protect their retirement benefits. [Most of] Our retirees don't get Social Security," he says.

Harris was born in College Station, where Texas A&M is located. His father Tom was an oil man, who traversed the globe selling the commodity to the military, only to settle in Harlingen, Texas, as a Baptist preacher. A devoted Texas Aggie, Harris drives two hours every two weeks to teach an evening course entitled "Titans of Investment" at his alma mater, where one of his children is in business school.

UNDER ITS REVISED PLAN, TRS targets an average return of 8.72% over 20 years, nearly a full percentage point higher than the current expected return of 7.73% obtained through the previous mix of equities and bonds. To meet this mark, Harris must duplicate the success of some endowments and private foundations by taking a more hands-on approach to managing risk and by following an absolute-return discipline.

Harris and strategic adviser Lee Partridge have devised a plan that remixes the categories -- they're not giving up on stocks and bonds -- to prosper in more varied scenarios. The portfolio is now 60% global equities (including U.S. and international stocks and private equity), 20% real-return strategies and 20% short-term investments.

Private equity, which is in both the global- equity and real-return groups, is slated to double to $10 billion in the next five years. It's already made a nice contribution: TRS' private equity has earned a three-year average annual return of 42.4%, better than 99% of all pension funds in its peer category.

Harris believes that the recent problems in private equity make it even more attractive, since valuations should come down. To build capacity, the TRS staff has grown to 100, from about 75. But it still needs to broaden and deepen its deal expertise so that it can handle the fast-emerging, big transactions that can boost returns.

Despite some controversy, the TRS board has been supportive of the new approach. "Much depends upon the level of trust we have with the board," says Harris. "Right now, things couldn't be better. We can now commit to deals approaching $500 million without getting prior approval. This will hopefully allow us to avoid the usual delays public pension plans face."

The fund's real-return investments can include Treasury inflation-protected securities, or TIPS, and real estate, which can include private equity as well as real-estate investment trusts. This segment should outperform if real gross domestic product comes in below target, inflation or stagflation re-emerges, or if equity markets struggle.

The short-term, stable-value investments should shore up returns in case inflation declines, GDP expectations drop, or a flight to quality takes hold. Some combination of cash, long-duration Treasury bonds and stable-value hedge funds would fill this segment. That means the hedge-fund stake will increase to $5 billion, from the current $3 billion over five years.

Not everyone is enamored of Harris' approach. Frederick "Shad" Rowe, chairman of the Texas Pension Review Board in Austin, agreed to speak with Barron's as a private citizen. He worries about the potential for big losses: "There seems to be a misunderstanding over risk, which they equate with volatility, and the absolute and permanent loss of capital...I don't think this approach is appropriate for all big public pension plans. They're certainly sophisticated, but it's not something I'd like to see everybody doing."

Rowe, counters Harris, prefers a "traditional deep-value approach that holds risks of its own because of concentrated equity positions or heavy bond allocations. Ultimately," says Harris, "the result would be low returns and reduced benefits."

Those who've worked with Harris say his experience as the head of a $150 billion hedge-fund complex in Westport, Conn., complements his modest Texas roots. Ray Dalio, founder of Bridgewater, says Harris "has a very sophisticated understanding of investments, with the common sense to stay away from the overly complex." Sounds like the proper course, if he holds to it.